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The world of Bitcoin is ever-changing at least in price terms. As I type this then one Bitcoin would cost some US $6720 as opposed to the peak of US $19187 in October of last year. So quite a drop but we also need to note that if we go back to this time last year it was just below US $2000 albeit the rocket engines to take it higher were firing up. So in terms of it being a replacement for money the price moves over the past year make it almost impossible to think of it as a store of value although if we look further back it remains party-time for longer-term investors.

The background

This is that Bitcoin continues to come under verbal and written attack. From Financial News this morning.

Three of the world’s most respected economists have led a joint attack on bitcoin, claiming the digital currency will be “regulated into oblivion” as governments globally move to clamp down on money laundering.

So the heat is on in terms of threats.

Joseph Stiglitz, Nouriel Roubini and Kenneth Rogoff have renewed their assault on the cryptocurrency believing it will be subject to further sharp and damaging falls as authorities crack down on criminals using Bitcoin to launder money and to avoid paying taxes.

These are familiar lines especially from Kenneth Rogoff who infamously does not like cash either. As to the title I think there are more than a few grounds to challenge this hype.

The three respected economists have renewed their assault on the cryptocurrency

Bank for International Settlements

Towards the end of June the General Manager of the BIS Augustin Carstens weighed in heavily on this issue. One particular section was breathtaking in its cheek and apparent avoidance of reality. The emphasis is mine.

Cryptocurrencies promise to replace trust in long-standing institutions, such as commercial and central banks, with trust in a new, fully decentralised system.

The trust issue is one that those in Denmark will be mulling right now. From the Financial Times last week.

The Kremlin critic investigating an alleged $230m Russian fraud is set to file a criminal complaint against Danske Bank in its home country of Denmark, accusing it of being a central player in a vast money laundering scheme.

As you can see we are shooting two birds with one stone as we note the “trust” in Danske and the fact that yet again it is a bank accused of money laundering on a grand scale or the exact opposite of the claims of Kenneth Rogoff.

Danske is under mounting pressure over the alleged money laundering. Mr Browder and local media claimed this week that the amount of transactions that flowed through the Estonian branch of Denmark’s biggest lender may have been as much as DKr53bn ($8.3bn), more than double previous estimates.

As the total market capitalisation of Bitcoin is US $141 billion it seems to lack the ability to match the banks in this area even if every Bitcoin is used for money laundering. After all Danske is only one bank and even if we just remain in the relatively small geographic area of the Baltics there seems to be a lot of money laundering going on. Here is the Baltic Times on the IMF visit to Latvia which ended at the weekend.

strong measures are necessary to restore the system’s reputation following the halt to ABLV Bank’s operations, the IMF points out. Effective implementation of anti money laundering and combating the financing of terrorism (AML/CFT) recommendations has to focus on reducing the proportion of questionable foreign deposits and the risks they pose to Latvia’s financial system.

For those wondering about ABLV I analysed its fall on the 19th of February. As to the ramifications this emerged at the end of last month according to Reuters.

Ilmars Rimsevics, a member of the European Central Bank’s policy-making governing council, was charged with soliciting and accepting a bribe, the Latvian Prosecutor General’s office said on Thursday.

This has posed two legal moral and ethical issues. Firstly there is the issue of financial crime in the Baltic based banks which presumably is why the head of ECB banking supervision Ms Nuoy has just visited Lithuania as according to domino theories it is the only one currently standing. Also it has raised the issue of how and if the law applies to central bank governors in the Euro area.

Oh and Mr.Carstens has thoughts in this area as well.

The goal should be to ensure that cryptocurrencies cannot undermine the role of central banks as trusted stewards of monetary and financial stability.

Technical Details

Hyun Song Shin has been the go to man for this sort of thing at the BIS for a while now although he does start by posing an issue for the BIS itself.

Much has already been said about how impractical cryptocurrencies are as a means of payment,
as well as the scope for fraud and other illicit activities they open up. The line from Agustín Carstens’
speech that they are a combination of a bubble, a Ponzi scheme and an environmental disaster has been
much discussed.

I thought that central banks liked bubbles! Is he really trying to tell us that they do not? The issue of the “precious” returns yet again as in spite of all the fraud issues people like this always highlight problems which are usually much smaller elsewhere.

Returning to his main points they are as follows.

One is the lack of scalability, which is about providing flexibility and capacity to function as a payment system regardless of the number of transactions.

The second problem is the lack of finality of payments. A payment being recorded in the ledger
does not guarantee that it is final and irrevocable. For cryptocurrencies, what counts as the truth is a matter
of agreement among the bookkeepers.

This bit also caught my eye.

At one point last December, the voluntary user fee
reached $57 dollars per transaction. So, if you insisted on buying a coffee for $2 with bitcoin, you would
have had to pay $57 to process the payment.

As someone who lives in central London I would like to know where you can get a coffee for US $2? More seriously Bitcoin needs to up its transactions game although if this was a bank no doubt the message would be that it is a result of its success.

Energy

This is a hotly debated topic as this from Crypto briefing highlights.

Published by the research team at CoinShares, a London-based cryptocurrency investment firm, the report argues that significant Bitcoin mining operations are principally powered by cheap renewable energy, and use roughly half the amount of energy that has been previously suggested.

According to the report, published today, the Bitcoin mining industry consumes approximately 35 TWh every year; 50% less than the 70TWh currently claimed by the Bitcoin Energy Consumption Index, which also argues that BTC mining has a carbon footprint that exceeds 32m tonnes annually. ( TWh =Terawatt Hours)

Best of luck with the idea that renewable energy is cheap! There are of course some examples but in general it is raising energy costs.

Comment

There is much to consider as we mull whether these are just birthing pains or crippling ones? On the side of the former is the way that the establishment continues to spend so much time trying to rubbish Bitcoin. If it is so bad why bother as it will collapse of its own accord if they are right? We get nearer the truth as we note that the accusation of promoting financial crime is beyond laughable from people who promote the “precious” with their next breath. As to technology I am also reminded that the UK banks are often accused of having systems still based in the 1970s. That may or may not be true but it is true that the Bank of England did not lower Bank Rate beyond 0.5% because it was afraid of the impact on the banks. Even now according to Governor Carney it thinks they cannot take them below 0% a consequence which I think is much for the best albeit it does highlight quite a weakness in IT.

Looking ahead this is so reminiscent of the development of the railways if we look at the broader picture. They are of course still with us although there are more than a few commuters who wish that they were not if their social media output is any guide.

Money, get away
Get a good job with more pay and you’re O.K.
Money, it’s a gas
Grab that cash with both hands and make a stash
New car, caviar, four star daydream,
Think I’ll buy me a football team ( Pink Floyd )

The weekend just gone has seen some extraordinary price moves and yet as I looked through most of the media early this morning there was no mention of it. For example I have just scanned the front page of the online Financial Times and there was not a peep. One mention on Bloomberg seems a little confused.

I didn’t realise it was marching towards respectability myself and if it was are hedge funds a benchmark? Apparently things are going badly.

It’s the latest blow for a digital currency that’s struggling to break into the financial mainstream.

The next bit I found particularly fascinating.

Joe Vittoria, CEO of the Mirabella platform, said he has doubts over bitcoin’s liquidity and where oversight might come from. There are also suggestions that the digital currency’s valuation should be below where it’s currently trading, he said.

You see that second sentence applies to so many markets right now for example many of the world’s bond markets have been pumped up by central bank buying. Others might be wondering is another example is the online food delivery company Just Eat in the UK which looks set to join the FTSE 100 as it has a larger market capitalisation than the supermarket chain Sainsburys.

For an article posted around 4 hours ago they seem rather behind the times.

While investors have embraced bitcoin, sending it soaring above $8,000.

Last night as I checked how financial markets were starting the week in the far east I noted this and put it on Twitter.

Bitcoin has been on another surge and is US$ 9396 now.

Of course it is soaring above $8000 technically but is behind events. Indeed this morning it has risen again as Reuters point out.

Bitcoin’s vertiginous ascent showed no signs of stopping on Monday, with the cryptocurrency soaring to another record high just a few percent away from $10,000 after gaining more than a fifth in value over the past three days alone.

The digital currency has seen an eye-watering tenfold increase in its value since the start of the year, and has more than doubled in value since the beginning of October.

It BTC=BTSP surged 4.5 percent on the day on Monday to trade at $9,687 on the Luxembourg-based Bitstamp exchange.

There are different pricing platforms but on the one I look at it reached US $9771 earlier. Although as ever there is a fair bit of volatility as it is US $9606 as I type this sentence.

Jamie Dimon

The Chief Executive of JP Morgan hit the newswires back on the 12th of September.

If a JPMorgan trader began trading in bitcoin, he said, “I’d fire them in a second. For two reasons: It’s against our rules, and they’re stupid. And both are dangerous.” ( Bloomberg)

Considering the role of the banking sector in money laundering and financial crime this bit was somewhat breathtaking.

“If you were in Venezuela or Ecuador or North Korea or a bunch of parts like that, or if you were a drug dealer, a murderer, stuff like that, you are better off doing it in bitcoin than U.S. dollars,” he said. “So there may be a market for that, but it’d be a limited market.”

This intervention can be seen two ways. The first is simply expressed by the fact that the price of Bitcoin has more than doubled since then. The second is ironically also that it has doubled as of course that is a building block in determining whether something is a bubble or not.

What has driven this surge?

Back on the 29th of December last year I pointed out the Chinese connection.

There have been signs of creaking from the Chinese monetary system as estimates of the actual outflow of funds from China seem to be around double the official one. Oops!

If we move onto this morning Reuters have been on the case.

By some estimates, China’s overall debt is now as much as three times the size of its economy……..Outstanding household consumer loans have surged close to 30 percent since the middle of last year and reached 30.2 trillion yuan as of October.

This has the government worried.

China’s central bank governor, Zhou Xiaochuan, made global headlines with a warning last month of the risks of a “Minsky moment”, referring to a sudden collapse in asset prices after long periods of growth, sparked by debt or currency pressures.

In such a position Bitcoin investment may seem a lot more sensible than otherwise. If nothing else those caught in the clampdown on the shadow banking sector may think that it is worth a go and the funds involved are so large it would only take a relatively small amount to have a large impact.

It was also be a particular irony if some of the money the Bank of China pumped into the system last week found its way into Bitcoin.

ECB and the war on cash

This is something which must provide some support to Bitcoin which is simply fears over what plans central banks have for cash. This particularly applies to those who have been willing to dip into the icy world of negative interest-rates such as the European Central Bank and I am reminded of this from the 22nd of this month.

The general exception for covered deposits and claims
under investor compensation schemes should be replaced by limited discretionary exemptions to
be granted by the competent authority in order to retain a degree of flexibility. Under that approach,
the competent authority could, for example, allow depositors to withdraw a limited amount ofdeposits on a daily basis consistent with the level of protection established under the Deposit
Guarantee Schemes Directive (DGSD)34,

Currently those with most to fear seem to be those with money in Italian banks although just to be clear as we stand now the deposit protection scheme up to 100,000 Euros still operates.

If we look forwards to the next recession it would appear that some central banks will arrive at it with interest-rates still negative so if they apply the usual play-book we will then see interest-rates negative enough to mean that cash will be very attractive. I have postulated before than somewhere around -1.5% to 2% is the threshold. Then they will have to do something about cash. Perhaps they are on the case.

Other fears may come from the way that central banks have expanded balance sheets and thus narrow measures of the money supply. The Bank of Japan explicitly set out to double the monetary base.

Comment

There is a mixture of fear and greed in the price of Bitcoin. The fear comes from those wishing to escape domestic worries in China in particular as well as worries about the next moves of central banks. The greed simply comes from the rise in the price which has been more than ten-fold since I looked at it on December 29th last year. So if you have some well done although of course the real well done comes when you realise the profit. I note others making this point.

Bitcoin’s market cap just passed 150 billion USD. For those who do not know, that is how much money NEW bitcoin “investors” will have to spend, in order for the current bitcoin holders to get the money that they THINK they have. ( @JorgeStolfi )

That statement is true of pretty much every price although of course some have backing via assets or demand. So often we see a marginal price used to calculate a total based on an average price that is not known. Also with a price that has varied between US $8992 and 9771 today alone I would suggest that this below must have more than a few investors screaming for financial stretcher bearers. From @JosephSkinner74

Long/Short Bitcoin swings with up to 100x Leverage at Bitmex! Enjoy a 10% Fee Discount!

What could go wrong?

This leaves us with the issue of how Bitcoin functions as a store of money which depends on time. Today’s volatility shows that over a 24 hour period it clearly fails and yet if we extend the time period so far at least it has worked rather well as one.

A royal wedding

Firstly congratulations to the hopefully – our royal family has form in this area – happy couple. But fans of the magnificent Yes Prime Minister will already be wondering what it is designed to distract us from and whether Theresa May has turned out to be more effective in this regard than Jim Hacker?!

One of the features of 2017 has been the extraordinary price volatility exhibited by Bitcoin. This has of course come at a time when many have been mulling exactly the reverse in equity markets although of course the current rhetoric over and from North Korea may well change that. For some perspective let us look back to the 29th of December.

“When I signed off before Christmas I ended with this.

The average price of Bitcoin across all exchanges is 910.16 USD

As you can take the boy out of the city but it is much harder to take the city out of the boy I had noted that it had been further on the move this week and now I note this.

So there has been a push higher and of course we are reminded of two things. The first is simply a factor of the way that we count in base ten meaning that the threshold of US $1000 is on the near horizon and the second is the Bitcoin surge of a bit more than a couple of years ago.”

Back then I pointed out two things. Firstly the chart pattern was of a “bowl” formation so that the price would need to keep rushing higher or it would end up like one of those cartoon characters who run over the edge of a cliff and briefly levitate before the inevitable happens. The next was that it was approaching the price of gold in individual units although later we looked at the fact that as an aggregate it was a long way away as there is much more gold.

What was driving things?

There were various influences. One generic was fear of what plans central banks have for fiat countries in an era of low and indeed negative interest-rates. Partly linked with this was the specific issue of demonetisation in India where some bank notes were withdrawn. Added to this was the continuing demand from wealthy Chinese to move some of their money abroad and the efforts of the authorities to block this so at times Bitcoin gets used.

The surge

Here is Fortune to bring us up to date.

Bitcoin was worth less than $590 a year ago. Then early Tuesday, the cryptocurrency surged to yet another all-time high above $3,500, as investors likely pulled their funds from the new Bitcoin spinoff, Bitcoin Cash or “Bcash,” to invest it in Bitcoin.

Bitcoin pulled back slightly by mid-day, trading at $3,430.

CNBC returned to the comparison with the price of gold although to be fair they did offer some perspective.

That’s nearly three times the price of gold, which settled at $1,262.60 an ounce, up nearly 10 percent for 2017…….That said, the gold market is worth trillions while bitcoin’s market capitalization is only about $57 billion…..Lee pointed out that the overall size of the gold market at about $7.5 trillion dwarfs that of bitcoin.

It didn’t take long from approaching the price of gold to nearly triple it did it? Bloomberg has decided to give us a comparison which will upset central bankers everywhere.

It has increased more than threefold this year, compared with a doubling in the value of Vertex Pharmaceuticals, the best performer in the S&P 500 Index.

At least they didn’t point out that it has gone up (much) more than house prices as there is only so much a central banker can take in one go! Still they were not finished with comparisons.

Here’s some other stuff you could buy for the price of one bitcoin, including but not limited to 100 22-pound boxes of Hass avocados.

Actually that don’t impress me much to coin a phrase as a PC user who is not especially keen on living solely on avocados and facing the consequences of setting up a stall to sell them all. But we get the idea.

Splitting the atom

The cryptocurrencies have a problem around growth and change and here is the FT Alphaville view on the fork at the opening of this month.

In the next 24 hours, the trust in the bitcoin system is going to be even more severely tested than usual. The community of miners, nodes and developers is initiating a so-called hard fork which hopes to expand the network’s processing capacity, allowing it to scale more effectively. In the process bitcoin will be split in half, and two new systems will emerge.

The hope is that faith will be channelled into the newly evolved, expanded and improved chain, while the old chain will be abandoned. But anyone and everyone who has a bitcoin will via the process suddenly be endowed with two assets instead of one, with a free option to support one and render the other useless. If the effective split makes people feel twice as enriched, it’s worth asking, why they shouldn’t feel inclined to keep hold of both of them? And that too will be an option.

It would appear that investors have sold the new Bitcoin cash to buy more of the existing Bitcoin. It would be amusing if they are rejecting change wouldn’t it? On a more serious note is this how money will be created in the future? We only have a very short time frame to consider but as we stand there has been both money and wealth creation here. Perhaps the central banks are in charge after all……

“With Segwit implemented, I believe $5,000 Bitcoin is within striking distance,” he concluded.

Comment

Let us look at the functions of money and start with a unit of account. Many people will know of Bitcoin but how many will account in it? Not much I would suggest. The price surge will mean that so far it has performed really rather well as a store of value and indeed quite an accumulator of it but we also need to note that along the way there have been sharp drops. There has been progress in it being a medium of exchange as more places accept it but it is still a very long way away from anything like universal acceptance.

However in continues to survive and in more than a few ways thrive. Fears of central banks blocking bank accounts continue to feed its growth. Frankly the rumours that Euro area bank deposits could be frozen in a banking collapse would have been cunning if started by a Bitcoin fan. There are loads of risks just like there are in any new venture but also care is needed as this from Gadfly of Bloomberg indicates.

There are also fears that big traders are having an undue influence on the price of Bitcoin, with one blogger flagging the actions of “Spoofy” — a nickname for traders who apparently place million-dollar orders without actually executing them. Bitcoin is essentially unregulated, so risks are abundant.

I love the idea that regulation has pretty much fixed risk, what could go wrong? But even more importantly many ordinary or dare I say it regulated markets are being spoofed these days and if the reports that reach me are any guide the regulators seem to have both a tin ear and a blind eye. Along that road we may well find a reality where for some Bitcoin looks rather like a safe haven although these days we need to add the caveat whatever that is?

Also finance regularly provides us with curiousities. Today’s comes from the land of the rising sun as we note that it is clearly in the firing line from North Korea and yet the Yen has strengthened through 110 versus the US Dollar.

On Friday the news in the UK was grabbed by the ransom wear attack called Wanna Cry. At first the media concentrated on the impact on the National Health Service but soon news that attacks were happening around the world filtered in as well. It was hard not to think of the large amount of funds that have been poured into NHS IT infrastructure which seemed somewhat at odds with the fact that it was still running Windows XP! Mind you as a person who was sold the Vista system by Microsoft I am someone who still thinks fondly of XP and think it was a better system.

However an intriguing part of the attack was the request to be paid in Bitcoin. Also I have to confess I was curious as to why the individual claims were small. From Wall Street Wires.

For instance, the ransomware is asking for $300 in Bitcoin.

Not much is it? Perhaps they hoped that it would be small enough that people would pay it discreetly and they would avoid publicity. Also if everyone paid up not doubt it would amount to a tidy sum indeed. It did bring Bitcoin back into mainstream news albeit in rather a seedy way. Although for our would be criminals there was something of a draw back which is that it turned out the world could watch them being paid. Indeed @actual_ransom is on the case.

Note: This bot is watching the 3 wallets hard-coded into #WannaCry ransomware. It tweets new payments as they occur, totals every two hours.

Of course the real boom will be in online security consultants who seem so far to be selected from a group who wear sunglasses indoors if the output of BBC News is any guide.

An Asset Bubble?

The Financial Times has been on the Bitcoin case.

Sky-high valuations for bitcoin have helped the value of crypto currencies burst through $50bn, raising fears of an asset bubble in the unregulated market.

A sky high valuation?

A sharp spike in the price of bitcoin, which has risen 55 per cent this month and is worth more than gold, pushed it past $1,900 on the Bitfinex exchange on Friday.

So the price has been very strong although I have to say that the idea that it “is worth more than gold” has a few issues with it. What is the unit of comparison for a start? After all gold is a physical commodity whereas Bitcoin is a virtual one. If we move to the aggregate level then if Only Gold is correct then all the gold so far mined is worth some US $7.4 trillion which rather dwarfs the US $50 billion value of the crypt currencies. Presumably they are comparing a singe Bitcoin with a troy ounce of gold. Also it is unusual for the FT to fear an asset bubble is it not?

A lot has been going on in this space including the fact that whilst Bitcoin is the most famous of the crypto currencies it is far from alone.

A growing number of alternative digital currencies — or “alt-coins” — is feeding the speculative frenzy with values in some rocketing as much as 500 per cent in the past week………Aside from bitcoin, there are more than 830 alt-coins ranging from Litecoin, a challenger to bitcoin, to MiketheMug, a coin that promises to make weekly payouts to holders.

There have been quite a few developments along the way.

An increase in initial coin offerings (ICOs) — unregulated issuances of crypto coins where investors can raise money in bitcoin or other crypto currencies — is fuelling the market and drawing attention from lawyers and financial professionals. Many fear ICOs, which are trying to market themselves as an alternative to venture capitalists as a way of raising cash for businesses, breach existing securities law.

Of course quite a lot of ordinary conventional offerings fail which poses quite a few questions for how you regulate such markets. Some seem to be the preserve of city professionals.

Observers say many individuals are trading alt-coins from corporate IT departments, concentrated in the financial sector and falling under the radar of senior executives. Many are sitting on virtual fortunes, but are unable to liquidate their cash as banks clamp down on measures to avoid money laundering.

There is an obvious problem with the phrase “virtual fortune” is there not? If they are legitimate it seems very odd that they are caught up in money laundering regulations so I suspect that there is more to this than meets to eye. After all the financial sector is ridden with financial crime of many sorts. Also I have seen plenty of supposedly bona fide markets where investors have been unable to realise the money they thought they had made. The case a couple of decades ago when investors put money into Italian shares is something of which I am reminded of by this. It was oh so easy to put money but, ahem, considerably more difficult to ever take it out.

Comment

If we step back for a moment we can compare Bitcoin with fiat money. On such a road we can see that the ground for Bitcoin has been fertilised by the way that central banks have been so keen on asset price rises. Compared to these assets which in concrete terms people face with the cost of housing but otherwise in bond and equity markets cash has depreciated in value. On that subject the UK FTSE 100 index has risen to an all time high of 7454 today again depreciating the value of cash money compared to it. Of course consumer inflation numbers look the other way from this.

There are obvious problems with the Bitcoin and crypto currency world. Firstly its role as a medium of exchange is limited as many places will still not accept it as a means of payment. That is why the recent news from Japan was welcomed by price rises. Also in an irony the recent price surge poses a question for its use as a store of value. It is not just the concept of “what goes up must come down” sung about by Blood Sweat & Tears in the song Spinning Wheel but also the issue that the price volatility means that the value is swinging wildly as Bloomberg point out.

Even during the huge run up this year, it has moved more than five percent on 21 different days, with nine of those being moves lower.

In the end it comes to the fact that Bitcoin fans have more faith in blockchain mathematics than central bankers. Of course some prefer the anonymity it provides and some just like the technological aspect. The main danger from authority must be from the likes of Kenneth Rogoff who must be very disappointed that the latest outbreak of financial crime is not being driven by high denomination bank notes. Of course there are other dangers which include it falling out of fashion and being replaced by other alternatives. Whilst there are obvious differences between this and the growth if the railroads back in the day there are similariites and how many succeeded again? Oh and as we stand it poses an increasing challenge to measures of money supply especially in areas where it is widely used.

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About the author

I am a freelance economist who studied at the London School of Economics. My speciality was (and still is) monetary economics. I worked in the City of London for several investment banks and then on my own account over a period of 15 years. After initially working in the government bond department at Phillips and Drew Ltd. I moved on into the derivatives arena with options of all types being a speciality. I never lost my specialisation in UK interest rates and also traded as a local on the London International Financial Futures Exchange where I mostly traded futures and options on future and present UK interest rates. So with my specialisations of monetary economics and konwledge of derivatives I have plenty of expertise to deploy on the financial and economic crisis which has unfolded in recent years.

I have also worked in Tokyo Japan again in the derivatives sphere and would particularly recommend Japanese food with a pork tonkatsu box lunch being one of my favourites. My name is Shaun Richards and as well as writing economics reports and analysis I also give speeches and lectures.Should one or all of these be of interest then please contact me via the contact details on this website.

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